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Venture capital in Silicon Valley is on the verge of a shake-up as old-timers, whose firms have helped build some of the world’s most innovative companies, prepare to hand the reins to a new generation.

The trend is being amplified by a hangover of capital from funds raised during the dotcom boom and a bleak market for initial public offerings that have combined to drive down returns, industry veterans say.

The result has been a bout of soul-searching as people who made money during the first dotcom boom question whether they want to remain in a business where it is increasingly hard to hit a big payday.

“People are tired,” said Alex Mendez, a partner at Storm Ventures. “People have been going through this nuclear winter trying to find exits. Some are just winding down and retiring.”

Recent months have seen a series of departures by partners at well-known Valley VC firms. While some have left to begin new projects of their own, others are expected to hang up their spurs.

The result is likely to be a shake-up among the leading participants in an industry where the top quartile of
VC firms has traditionally accounted for the vast majority of returns.

“Five years from now, when you look at who people think are the top firms, there will be at least 50 per cent turnover of what the list was five years ago,” said Clint Harris, founder and managing partner of Grove Street Advisors, an investment management group.

Although the market
for acquisitions remains healthy, a weak market
for public offerings has increased the pressure on some VC groups that are already struggling to make positive returns from massive funds that were raised at the height of the bubble. Many of those funds are only now reaching maturity.

The malaise stands in contrast to the excitement surrounding a new generation of start-ups such as YouTube, the online video site that was recently bought by Google for $1.65bn.

“You are not going to make the super-huge type of return off an acquisition,” said Mark Heesen, president of the National Venture Capital Association. “You can’t make a Google off an acquisition, and a YouTube comes along only very rarely.”

Still, said Mr Harris at Grove Street, while individual firms might struggle, the outlook for venture capital as an asset class remained healthy. “We view the venture industry as relatively in balance and we view the small end of the buyout market as also attractive,” he said. “The area we are most nervous about is the mega fund buy-outs.”

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